Fixing postal pensions doesn't need to cost taxpayers

Every day, tens of thousands of postal workers take to American streets to drop letters in mailboxes and packages on porches. Day after day after day. Every year, thousands of postal workers retire, joining the pension roles like their peers who spent their lives in other lines of government work. But unlike the other government pensions, postal retirement benefits are governed by different rules that can mean extra things current workers need to worry about when deciding to take a job at USPS.

Today, the postal service stands at a crossroads. Mail volume is lower today than in 1980. Bureau of Labor Statistics data indicate that postal worker productivity has declined in the last 10 years. Facilities are aging and need maintenance, and USPS needs a new fleet of mail trucks. Bleak business prospects mean bleak hopes for extra money to pay for growing pension and retiree healthcare costs. Policymakers, from the administration to Congress, are considering multiple paths forward by changing regulations relating to various aspects of the postal business model.

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Updating rules on how postal pension money is invested is one option on the table. Currently, postal pension money must be invested in special, inflation-indexed bonds issued by the Treasury. These bonds have virtually no risk of loss, which past policymakers thought would prevent postal pension funds from losing money were it invested in standard stocks and bonds or were inflation to increase. Yet, this extra-conservative investment strategy has not been without costs. Pension obligations are increasing. Postal retirees are living longer and healthcare costs are rising as they do so. A gap has formed between long term costs and the amount of money the service has at the Treasury.

Unlike other challenges USPS faces, this one has straightforward solution. A study commissioned by the postal service’s inspector general’s office found that the underfunding problem could disappear if postal pension money were invested like pension funds of the typical state or local government worker. Even under a conservative investment strategy, two of the three postal pension funds could earn returns that would bring the postal retiree benefit funds back to solvency. Under the same scenario, the deficit in the third fund would be cut in half. Moving to a “medium risk” traditional investment strategy would make all three funds solvent in the median scenario.

Liberalizing postal pension investment rules is a unique opportunity to reform a pension system without labor, consumers, or taxpayers taking a hit. The only body losing value would be the Treasury, who would no longer have a monopoly on investing postal pension dollars. Even the Treasury might not lose out. Ending its monopoly and allowing the rate of return on postal pension assets to rise makes it less likely postal pensions will need an eventual taxpayer bailout.

Fully funded pensions also ease any potential major structural reforms to the postal service. It opens the possibility of giving postal unions more say in postal pension management while at the same time adding transparency to how much money is needed to pay for these benefits. Moving new workers to 401(k) style plans is a lot more palatable when they’re not also earning less to pay for the pensions of previous workers too.

Unfunded pension liabilities come with fear that any substantial update of the USPS business model won’t yield enough revenue to pay for USPS’ commitment to its retirees. Yet the current system has risk too, and the pension fund deficit grows every year. In a fast-changing postal industry, an extra conservative pension investment strategy enshrined in law is a luxury taxpayers have no reason to want, and postal retirees, current and future, cannot afford.

Nick Zaiac is a commercial freedom fellow with the R Street Institute, a nonprofit group dedicated to promoting limited government.